Kidder, Peabody & Co. v. Brandt , 131 F.3d 1001 ( 1997 )

United States Court of Appeals,
Eleventh Circuit.
No. 97-2123.
KIDDER, PEABODY & CO., INCORPORATED, Plaintiff-Appellant.
v.
Robert BRANDT, as trustee, Selma Brandt, John H. Gary, Donna L. Gary, Irwin Goldstein, et
al., Defendants-Appellees.
Dec. 22, 1997.
Appeal from the United States District Court for the Middle District of Florida. (No. 94-1510-CIV-
T-17A), Elizabeth A. Kovachevich, Judge.
Before COX, DUBINA and CARNES, Circuit Judges.
CARNES, Circuit Judge:
This case involves a claim arising under the Racketeer Influenced Corrupt Organizations Act
("RICO"), 18 U.S.C. § 1962. The issue before us, however, involves less the intricacies of RICO
law and more § 15 of the National Association of Securities Dealers Code of Arbitration (the
"NASD Code"). That section provides that no dispute, claim or controversy is eligible for
arbitration where six years have elapsed from the "occurrence or event giving rise to the act or the
dispute, claim or controversy." This appeal turns on the definition of the quoted language.
We hold that the occurrence or event giving rise to a claim for purposes of § 15 of the NASD
Code is the one necessary to make the claim viable, the occurrence or event after which a complaint
specifying the facts would withstand a Federal Rule of Civil Procedure 12(b)(6) motion. Our
holding requires a remand of this case for further proceedings in the district court.
I. FACTS AND PROCEDURAL
HISTORY
Kidder, Peabody & Co., Inc. ("Kidder") is a securities broker. Around 1987, a group of
individuals (the "defendants") purchased shares in a limited partnership through Kidder. As a
condition of purchasing securities through Kidder, each of the defendants agreed to submit any
dispute or claim arising out of or relating to their Kidder accounts to arbitration. That agreement
specified that the NASD Code would govern any arbitration claim they brought.
In 1994, the defendants filed a seven-count arbitration complaint against Kidder alleging,
among other things, that Kidder had violated RICO, 18 U.S.C. § 1962. Before any action could be
taken on that complaint, Kidder filed suit in federal district court, based upon diversity jurisdiction,
seeking a declaration that the defendants' claims were ineligible for arbitration and an injunction
forbidding the defendants from pursuing their claims in arbitration.
Kidder filed a motion for summary judgment contending that the "occurrence or event"
which gave rise to the defendants' claims did not occur within six years of the date defendants filed
their arbitration complaint as required by § 15 of the NASD Code. The district court granted
Kidder's motion in part and denied it in part. Relevant to this appeal, the district found that the
"occurrence or event" which gave rise to defendants' RICO claim was a "pattern of racketeering
activity" which began more than six years before the defendants filed their arbitration complaint but
ceased inside the six-year window. Based on that finding, the court denied Kidder's motion with
respect to defendants' RICO claim. As to that claim, the court entered summary judgment for the
defendants, declaring that the RICO claim was eligible for arbitration. Kidder filed a motion to alter
or amend the judgment which the court denied. Kidder appeals from the district court's order on
summary judgment and its order denying Kidder's motion to alter or amend the judgment.
II. STANDARD OF REVIEW
We review the district court's denial of injunctive relief under an abuse of discretion
standard, see Simmons v. Conger, 86 F.3d 1080, 1085 (11th Cir.1996), but "we review de novo
determinations of law made by the district court en route," Teper v. Miller, 82 F.3d 989, 993 (11th
Cir.1996). "The standard of review for the district court's denial of a motion to amend final
judgment is abuse of discretion." Armstead v. Coler, 914 F.2d 1464, 1466 (11th Cir.1990) (citation
omitted).
III. DISCUSSION
Kidder contends that the district court erroneously interpreted and applied § 15 of the NASD
Code to the facts of this case. That section provides:
No dispute, claim or controversy shall be eligible for submission to arbitration under this
Code where six (6) years shall have elapsed from the occurrence or event giving rise to the
act or the dispute, claim or controversy. This section shall not extend applicable statutes of
limitation, nor shall it apply to any case which is directed to arbitration by a court of
competent jurisdiction.
The district court found that the "occurrence or event" giving rise to the defendants' RICO claim was
a pattern of racketeering activity, "at least a portion of [which] allegedly occurred within the Section
15 time frame." On the basis of that finding, the court concluded that the defendants' RICO claim
was eligible for arbitration.
Kidder argues that under § 15 the defendants' RICO claim was not eligible for arbitration,
unless all of the predicate acts upon which that claim was based occurred within six years of the date
defendants filed their arbitration complaint. Specifically, Kidder states: "Defendants' Federal RICO
claim is eligible for arbitration only if each act or fact which forms each of the elements of their
Federal RICO claim—including those underlying the pattern element—took place within the six
year period preceding the initiation of arbitration." If Kidder's interpretation of § 15 is correct, the
defendants' RICO claim was not eligible for arbitration, because the district court found that some
of the predicate acts supporting the claim took place outside the six-year window.
Kidder asserts that its interpretation of § 15 is supported by our decision in Merrill Lynch,
Pierce, Fenner & Smith, Inc. v. Cohen, 62 F.3d 381 (11th Cir.1995). However, in Cohen, we did
not define the phrase "occurrence or event giving rise to the ... claim." Instead, we merely
recognized, under facts similar to those here, that "[i]t is not a foregone conclusion ... that the
purchase date is the relevant occurrence or event giving rise to the Cohens' claims, as neither § 15
nor any other provision of the NASD Code so provides." Id. at 385.
Far from supporting Kidder's interpretation of § 15, Cohen is actually inconsistent with
Kidder's position. In that case, the Cohens began purchasing securities from the defendant in 1985.
They alleged that from 1985 through 1991 the defendant had misrepresented the value of their
investments in statements it sent to them. The Cohens filed an arbitration complaint in 1993
asserting a claim for breach of fiduciary duty. Because the existence of a fiduciary duty was one
element of the Cohens' claim, they had to prove that the defendants owed them a fiduciary duty.
That duty was born when the Cohens purchased securities from the defendant in 1985, more than
six years before the Cohens filed their arbitration complaint. Under Kidder's interpretation of § 15,
the Cohens' claim would have been ineligible for arbitration because one of the acts upon which
their claim was based occurred outside the six-year window. However, we did not adopt that
interpretation of § 15. Instead, we recognized that, if the defendant had made misrepresentations
within the sixyear window, the Cohens could have claims for breach of fiduciary duty that would
be eligible for arbitration. See id. at 385. We stated that "each misrepresentation [e.g., the
statements the defendant sent out] might be an event or occurrence giving rise to a claim for breach
of fiduciary duty." Id. at 385 n. 7; see also Osler v. Ware, 114 F.3d 91, 92-93 (6th Cir.1997)
(plaintiff who opened securities account in 1984 and filed arbitration complaint in 1993 could have
an arbitrable claim based on defendant's misrepresentations made within the six-year window);
PaineWebber Inc. v. Hofmann, 984 F.2d 1372, 1381 (3d Cir.1993) (misrepresentation could be the
act or occurrence giving rise to arbitrable claim).
Therefore, we reject Kidder's interpretation of the "occurrence or event giving rise to the ...
claim" language of § 15. Instead, we hold that under § 15 the "occurrence or event" which "gives
rise to the ... claim" is the last occurrence or event necessary to make the claim viable. A claim is
viable when all the elements of that claim can be established such that it could withstand a motion
to dismiss for failure to state a claim for relief pursuant to Federal Rule of Civil Procedure 12(b)(6).
Of course, the last "occurrence or event" necessary to make a claim viable depends on the
nature of a particular claim. In some instances, a single "occurrence or event" will establish all the
elements of a claim. For example, the single act of striking another may establish all the elements
of a claim for battery. In that instance, the act of striking another may be the "occurrence or event"
which "gives rise" to a claim for battery.
In other instances, separate "occurrences or events" establish the various elements of a claim.
For example, an action for negligence based on the defective design of a product is not viable until
an injury is caused by that product. Although the duty and breach elements of such a claim are
established by the company's act of marketing the product, that act does not establish the causation
and injury elements of the claim. The incident in which the product causes injury, not the company's
act of marketing a defective product, is the "occurrence or event which gives rise to the ... claim"
within the meaning of § 15. Hypothesizing some dates for the occurrences or events in this example
reveals the flaw in Kidder's position. Suppose that the company marketed the defectively designed
product in year one and that, as a result of that defective design, the product caused injury in year
eight. Under Kidder's theory, even if a claimant filed an arbitration complaint the moment after his
or her claim arose—the moment after he or she was injured—the claim would be ineligible for
arbitration. We decline to adopt an interpretation of § 15 that would render some claims ineligible
for arbitration before they even come into existence.
Having discussed the meaning of § 15's "occurrence or event giving rise to the ... claim"
language, we turn now to the district court's application of that language to the facts of this case.
The district court found that the "occurrence or event" which gave rise to defendants' RICO claim
was a "pattern of racketeering activity." Because a "pattern of racketeering activity" is, by
definition, a composition of multiple distinct "occurrences or events," we conclude that the district
court failed to identify precisely the last "occurrence or event" necessary to make the defendants'
RICO claim viable. Therefore, we remand the case to the district court with instructions to identify
the occurrence or event which created a viable RICO claim for the defendants. If the occurrence or
event which made the claim viable took place more than six years from the date the defendants filed
their arbitration complaint, the claim is ineligible for arbitration.
The thrust of defendants' position is that the district court incorrectly identified the
"occurrence or event" giving rise to their claims. In essence, the defendants argue that they have
multiple RICO claims, each occasioned by an injurious act which took place within the six-year
window. The defendants assert that it is those acts, not a "pattern of racketeering activity" which
is the "occurrence or event" giving rise to their RICO claims. We do not foreclose that possibility.
On remand, the district court should consider whether the defendants have proved that Kidder
committed acts within the six-year window that caused the defendants injury, and if so, whether
those injurious acts created independent RICO causes of action. See Bivens Gardens Office Bldg.,
Inc. v. Barnett Bank of Florida, Inc., 906 F.2d 1546, 1554-55 (11th Cir.1990) ("We hold, therefore,
that with respect to each independent injury to the plaintiff, a civil RICO action begins to accrue as
soon as the plaintiff discovers, or reasonably should have discovered, both the existence and source
of his injury and that the injury is part of a pattern.") (emphasis added). If the facts reveal that the
defendants have multiple RICO claims, it is possible that some will be ineligible for arbitration
because they arose outside the six-year window, while others may be eligible for arbitration because
they arose inside the six-year window.
We recognize that the district court's task on remand may not be a simple one. To determine
whether defendants' RICO claim or claims are eligible for arbitration, the court must go beyond the
allegations of the complaint and examine the evidence the parties offer, if any. The burden of
production and persuasion is on the plaintiff, Kidder. Although it might be necessary for the court
to hold a "mini-trial" to identify the last occurrence or event necessary to make the defendants' RICO
claim or claims viable, as we noted in Cohen, that burden is "[in]sufficient to justify interference
with the binding agreement of the parties [to arbitrate their claims]." 62 F.3d at 385.
IV. CONCLUSION
For the reasons set forth above, we VACATE the judgment of the district court and
REMAND the case with the instruction that the district court make detailed findings of facts
concerning the occurrence or event giving rise to defendants' RICO claim.